Chipotle Mexican Grill: Fast Growth and a High-Flying Stock

Chipotle
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Chipotle Mexican Grill began as a simple burrito shop in a converted Denver ice cream parlor in 1993. Founder Steve Ells envisioned the restaurant as a cash cow that would fund a costlier, and financially riskier, fine dining establishment. But over the years, the plans to upscale were left behind as Chipotle grew into a massive, 3,000-store chain.

The restaurant attracted a young, loyal fan base with its industrial chic decor and used fresh ingredients that put a healthy twist on traditionally downscale Mexican food. In contrast to its big-chain, fast-food rivals, Chipotle was also known for a pledge to invest in employees, source ingredients locally, and hold to environmental sustainability.

To avoid limited-menu staleness, Chipotle has rolled out several new items in recent years, including hand-crafted quesadillas, carne asada, a supergreen salad and plant-based chorizo.

The Direct Ownership Model

Unlike other national chains, Chipotle doesn’t franchise its concept. As new outlets opened at the rate of several hundred every year, Ells and partners chose to keep direct corporate ownership of the entire chain.

The stated goal was more control over appearance and food quality, but direct ownership has also been good for company financials. Instead of royalties being paid by third-party operators, Chipotle earns its money straight from in-store and digital restaurant sales, as well as price bumps charged for delivered items.

Building Wealth

For this chain, direct ownership has worked. As big franchisers Subway, McDonald’s and Domino’s looked on enviously, Chipotle’s sales rose steadily over the years, reaching a company record just shy of $6 billion in 2020.

The stock has climbed skyward as well. While the company kept the public float, i.e., available shares, relatively small, the fast gains in net earnings pushed the price of Chipotle shares to an all-time high of $1,958.55 in 2021.

Surge in Digital Sales

Along with other takeout/drive-through fast-casual restaurants, Chipotle held advantages while dealing with the COVID-19 pandemic. The company has also benefited from its investment in digital ordering, which allows for delivery as well as customer pickup through dedicated “Chipotlanes.”

Sales from the burgeoning online and mobile platforms rose from 10.9% of revenue in 2019 to 46.2% in the pandemic year of 2020, when in-restaurant dining was restricted — or in many locations, shut down altogether.

Innovation in the customer experience didn’t end with digital ordering. Chipotle Extras, an enhanced loyalty program, had attracted 24 million members by September 2021. As explained in a company press release, each member has an individualized profile on the Extras app, which “gamifies Chipotle Rewards with personalized challenges to earn extra points and collect achievement badges.”

Building Wealth

Expansion Carries on Unhindered

During the initial onset of the COVID-19 pandemic — while the restaurant industry struggled with falling traffic, employee retention and logistical problems — Chipotle skillfully navigated the troubled waters, opening several hundred new stores. As the pandemic subsides and customers return to in-store dining, the chain is planning further expansion in Europe, with an ultimate goal of 6,000 outlets internationally.

The company is set to leverage its digital footprint as it expands in the U.K. and throughout Europe. Commenting in mid-2021 on the prospects for fast-casual Mexican shops in this market, new CEO Brian Niccol explained to Restaurant Business that Chipotle has “more levers than ever before to be successful in new markets, between our digital system, the varying asset designs that we can bring to market and … just the strength of the brand.”

Food Safety Issues Draw Headlines, Fines

Chipotle has had its share of negative headlines around food safety and employee retention. A fast-casual restaurant insisting on locally sourced, ready-made, always-fresh ingredients places a load of stress on line cooks as well as suppliers. Cut corners and careless food prep caused foodborne illness outbreaks on several occasions before the pandemic.

In April 2020, Chipotle agreed on a $25 million fine, a record amount in a food safety settlement, for felony charges of violating the Food, Drug, and Cosmetic Act.

Earnings Don’t Slow Down

The settlement and the headlines didn’t seem to blunt customer appetites in 2021, when COVID-19 pandemic restrictions eased and Chipotle continued to report record earnings.

For the second quarter of 2021, the company reported a net of $6.60 a share and beat forecasts for both net earnings and sales. This represented a solid gain from $0.29 reported in the COVID-19 depressed second quarter of 2020. Same-store sales increased 31% while operating margins also improved.

Over the past few quarters, Chipotle has made a habit of beating analyst earnings forecasts. The market has rewarded the company with a very rich price-to-earnings ratio of around 63, more than that of trend-setting competitors such as Starbucks and Texas Roadhouse.

As reported in CNN Business, analysts are positive on the stock’s outlook, with a median target of $1,981 over 12 months. But there’s an extremely wide range in the forecasted stock price, with the highest estimate reaching $2,600 and the lowest at $1,256.

Future Outlook

While Chipotle has probably been the country’s most successful chain restaurant over the past few years, it’s also enjoying a very rich share price. The price/earnings ratio is on the high end historically and in October 2021 was triple that of the P/E of the S&P 500 (already notably high at about 30). Confident individual investors, institutions and hedge funds may start to waver in the event of any bad news or earnings stumbles in the future.

There’s no shortage of possible causes.

  • Staffing problems. Like all restaurants, Chipotle is dealing with a post-pandemic shortage of workers.
  • High and rising labor costs. In 2021, the company enacted a $15-an-hour minimum and raised menu prices 4%. It also intends to keep to a longstanding policy of providing good health and education benefits for the 90,000 workers it directly employs.
  • Inflation. While predicting a stock price above $2,100 before the October earnings release, analysts at Goldman Sachs also came in on the downside of consensus revenue and earnings forecasts.

Goldman pointed out that Chipotle’s practice of locally sourcing ingredients made it particularly vulnerable to price inflation: “Gross margins could see pressure from commodity inflation, particularly if protein spot purchases are necessary to keep up with elevated demand.” The big investment bank also predicted that labor costs will only increase.

As it turned out, however, Goldman and others were off on the third quarter. On October 21, Chipotle announced a major beat to sales and net earnings forecasts. Earnings came in at $7.02 per share, while revenue at $1.95 billion edged out the consensus estimate of $1.94 billion.

Analysts were right about the higher costs, but Chipotle managed to overcome its rising expenses with its menu price hike. That turned out to be no problem for same-store sales, which rose 15.1%, and digital sales, which beat the previous quarter by 8.6%.

Chipotle Stock: Is it a Good Buy?

Owning shares in this company means betting that its rapid growth can continue and the stock can maintain a high P/E multiple. Investors should also feel confident that Chipotle’s direct-ownership business model can accommodate double the number of stores and avoid any stumbles while expanding to overseas markets.

Analysts have remained positive on the stock. Of 33 analysts recently surveyed by The Wall Street Journal, 18 rated it a buy and 12 a hold. Further positive news on the earnings front should lend support, but beware market turbulence, which can hit high-flying growth stocks harder than it affects the steadier “value” plays in the stock universe.

Good To Know

Investors may hesitate when considering a buy among high-flying growth stocks such as Chipotle. A rich share price and a steep P/E ratio mean it’s a long way down if the company stumbles. But the trendy fast-casual Mexican eatery achieved success with good management and hip concepts, and Chipotle has demonstrated powerful growth in sales and profits even while dealing with food safety issues and a pandemic.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

​​A writer and editor with more than 100 book credits in the juvenile and young adult non-fiction format, Tom Streissguth has mastered the craft of explaining complex, difficult subjects clearly. His books have covered history, geography, economics, media and current affairs; he's also written biographies of historical figures for Lerner, Enslow, Facts on File, Greenhaven and other major educational publishers.

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